Correction to This Article
A headline on a June 21 Business article incorrectly said that Allied Capital agreed to added oversight as part of a settlement with Securities and Exchange Commission. Allied agreed to continue steps it had already put in place.

Allied Capital, SEC Settle on Investment Pricing

Network News

Allied Capital failed to preserve documents to support how it valued investments between 2001 and 2003, securities regulators said as part of a settlement yesterday.

The District financial services firm did not admit or deny wrongdoing under the agreement with the Securities and Exchange Commission.

Allied had been accused by some longtime critics of inflating the value of a series of troubled investments. Regulators were silent on that issue, saying only that the company lacked sufficient documentation to support the way it arrived at values for 15 investments examined by the SEC.

No individuals at the company, which provides financing for management buyouts and supplies interim funds through loans and other debt, were singled out for punishment, and the company faces no financial penalty. Instead, Allied agreed that for the next two years it will continue to employ a corporate valuation officer and will pay outside consultants to oversee the process by which it prices investments, according to the SEC order.

"We are pleased to resolve this matter and look forward to focusing our energy on continuing to enhance shareholder value," chief executive William L. Walton said in a statement.

The company "believes that the settlement represents a constructive conclusion" to the three-year-old investigation, Allied said in a statement.

Securities regulators pointed out instances in which Allied failed to retain documentation supporting its estimates, and they said the company sometimes used different financial yardsticks to calculate the fair value of the same investment without written explanation.

Preserving such documentation is important because many of Allied's investments are difficult to value on the open market. Under SEC rules, investment companies are supposed to use "good faith" to determine which prices they can reasonably expect if they sell their investments.

"The valuation of those securities in the portfolio are not easily quantifiable," said Cheryl Scarboro, associate enforcement director at the SEC. "The message here is, we want to make sure companies adhere to the standard that has been laid out."

In 2001 and 2002 filings, Allied valued its stake in an unnamed telecommunications company based partly on revenue from discontinued lines of business. The company told the SEC that it reduced those estimates by a certain factor to guard against an overstatement, but the SEC said Allied did not provide enough supporting documentation. Allied valued the stake at $20 million and then $10.3 million. Later, the company wrote down that investment to $245,000, according to the SEC order.

On another occasion, Allied wrote down an investment in an office-supply company to $50,000 for the quarter ended in June 2002 after putting an $8 million valuation on the same investment as late as March 2002, regulators said.

"Allied's written valuation documentation failed to include all relevant facts available to it regarding [the company's] deteriorating financial condition, including the fact that [the company] had lost one of its largest customers as a result of the terrorist attack on the World Trade Center," the SEC said in its order.

Federal prosecutors in the District continue to investigate tactics that Allied may have used to obtain phone records of persistent critics, including hedge fund manager David Einhorn of Greenlight Capital. Allied disclosed in securities filings earlier this year that it had received a D.C. grand jury subpoena concerning possible improprieties.

Jeff Lloyd, a spokesman for Allied, declined to comment on that investigation. Channing Phillips, a representative for the U.S. Attorney's Office, did not return a call yesterday.

Einhorn, who has waged a five-year war of words with Allied managers over their accounting and disclosure practices, seized on the regulatory settlement in a statement he issued yesterday through an outside public relations firm.

"The question is how many more shoes have to drop and denials be discredited before the Board of Directors acts responsibly and removes management, whose integrity and credibility has been decimated by this order," Einhorn's statement said.